Mind the Gap: The role of ESG distance and direction in acquirer returns around M&A announcements

Abstract

This thesis examines the financial implications of sustainability performance in the context of M&As, focusing on how ESG factors influence shareholder value. Using a sample of 440 M&As transactions from 2014 to 2024 in Europe and North America, the study investigates the impact of target ESG performance, the magnitude of ESG distance, and the direction of ESG distance between acquirer and target firms on acquirer CARs around the M&A announcement date. An event study methodology combined with cross-sectional regression analysis is employed. The results show that higher ESG scores in target firms are associated with significantly higher acquirer CARs, although the effect size is modest. Furthermore, greater ESG misalignment, both in magnitude and direction, is associated with lower acquirer CARs, indicating that the market reacts negatively to perceived ESG incompatibility. These findings highlight the growing importance of ESG compatibility in M&A transactions and suggest that while ESG can contribute to value creation, misalignment may signal risk and integration challenges. The study contributes to the ongoing debate over whether ESG creates or destroys firm value and offers implications for investors, managers, and policymakers navigating sustainability driven initiatives.